1940 (2) TMI 14 - HC - Income Tax

Summary

Issues:
1. Whether the appellant company is entitled to deduct wear and tear allowances incurred by the constituent companies before amalgamation.
2. Whether the appellant company can set off losses incurred by the constituent companies before amalgamation against its own profits.
3. The interpretation and application of rule 11 of the Rules applicable to Cases I and II of Schedule D to the Income Tax Act, 1918, as amended by Section 32 of the Finance Act, 1926.
4. The effect of Sections 153 and 154 of the Companies Act, 1929, and the order of Eve, J., on the appellant company's claims.

Detailed Analysis:

1. Deduction of Wear and Tear Allowances:
The appellant company claimed the right to deduct the wear and tear allowances of the strip company from its own profits. The Special Commissioners and the Court of Appeal held that the appellant company, being assessed as if a new trade had commenced, was not entitled to such deductions. The primary legal basis for this decision was rule 11 of the Rules applicable to Cases I and II of Schedule D to the Income Tax Act, 1918, as amended by Section 32 of the Finance Act, 1926. This rule states that the tax payable by a successor to a trade should be computed as if the successor had set up or commenced the trade at the time of succession, effectively preventing the deduction of allowances arising before the new trade was set up.

2. Setting Off Losses Incurred by Constituent Companies:
The appellant company also claimed the right to set off trading losses incurred by the steel company and the strip company against its own profits. The Court of Appeal and the House of Lords rejected this claim, emphasizing that the relief under Section 33 of the Finance Act, 1926, is personal to the entity that sustained the loss. The argument that the order of Eve, J., transferring the undertakings of the two companies, also transferred the right to such deductions was dismissed as requiring an "impossible construction" of Section 154 of the Companies Act and the order of Eve, J.

3. Interpretation and Application of Rule 11:
The House of Lords analyzed the language of the new rule 11 introduced by Section 32 of the Finance Act, 1926. The rule distinguishes between changes in partnership and successions to a trade. For successions, it mandates that the tax payable by the successor be computed as if they had commenced the trade at the time of succession, and the tax payable by the predecessor as if the trade had been discontinued. This interpretation was upheld, concluding that the appellant company could not claim deductions for allowances or losses incurred by the predecessor companies.

4. Effect of Sections 153 and 154 of the Companies Act, 1929, and the Order of Eve, J.:
The appellant company argued that the order of Eve, J., made under Sections 153 and 154 of the Companies Act, 1929, transferred the right to deductions to the newly-formed company. The House of Lords rejected this argument, noting that the right to deductions for losses and wear and tear allowances is personal to the entity that incurred them and cannot be transferred by court order. The judgment emphasized that the Companies Act did not intend to amend the Finance Act by allowing such a transfer.

Conclusion:
The appeal was dismissed with costs. The House of Lords upheld the decisions of the Special Commissioners and the Court of Appeal, concluding that the appellant company was not entitled to deduct wear and tear allowances or set off losses incurred by the predecessor companies against its own profits. The interpretation of rule 11 and the effect of the Companies Act were pivotal in reaching this decision.